Cooperative 

Apartment 

Investment 


By  V.  C.  ROSS 


This  is  the  last  in  a  series  of  six  consecutive  articles,  the  first 
of  which  appeared  in  the  August  15  issue.    The  author,  Mr.  V. 
C.  Ross,  is  a  well-known  authority  on  the  subject  of  financing 
co-operative  apartment  houses 


Reprinted  from  The  SPUR 
NOVEMBER  ist,  1927 


Co-operative  Apartment  Investment 


By  V.  C.  Ross 

THE  modern  co-operative  apartment  ownership  plan  has  so 
consistently  accomplished  the  purposes  for  which  it  was  de- 
signed that  co-operative  apartment  enterprises  are  now  being 
successfully  conducted  in  almost  every  large  city  in  the  United 
States  and  in  many  of  the  smaller  residential  communities.  The  char- 
acter and  business  standing  of  the  individuals  who  are  satisfied  owners 
of  co-operative  apartments  are  very  positive  evidences  of  the  high 
opinion  with  which  the  modern  co-operative  apartment  ownership  plan 
is  considered  from  an  investment  viewpoint.  Many  of  the  most  able 
and  conservative  architects,  attorneys,  bankers,  brokers,  builders,  busi- 
ness executives  and  real  estate  dealers  in  New  York  are  contented 
owners  of  co-operative  apartments.  The  unqualified  endorsement  of 
the  modern  co-operative  apartment  ownership  plan  by  those  who  are 
best  qualified  by  training,  experience  and  expert  knowledge  to  pass 
upon  its  soundness  is  a  recommendation  that  no  homeseeker  can  afford 
to  overlook. 

Co-operative  home  ownership  projects  have  been  organized  by 
groups  of  individuals  who  have  decided  to  erect  new  buildings  in  which 
they  could  live  as  neighbors  as  well  as  by  groups  of  tenants  who  have 
decided  to  purchase  the  existing  buildings  in  which  their  apartments 
were  situated.  Such  projects  have  also  been  organized  by  large  land 
owners,  real  estate  dealers,  architects,  engineers  and  builders. 

A  co-operative  apartment  building  may  contain  only  two  or  three 
apartments  or  it  may  contain  more  than  a  hundred.  Many  of  the 
buildings  now  being  built  contain  about  twenty  apartments.  One  re- 
cent building  contains  one  hundred  and  twenty  moderately  priced  apart- 
ments, all  of  which  were  bought  before  the  building  was  ready  for 
occupancy.  A  co-operative  apartment  may  contain  only  two  or  three 
rooms  or  it  may  contain  twenty  or  thirty  rooms.  Many  of  the  apart- 
ments now  being  offered  for  sale  contain  eight  or  nine  rooms.  One 
New  York  City  apartment  contains  thirty  rooms.  Co-operative  apart- 
ments may  be  priced  at  anywhere  from  about  $4,000  upward.  An 
excellent  apartment  may  be  bought  for  less  than  $20,000.  One  large 
New  York  City  apartment  was  recently  bought  for  $450,000. 

Some  of  the  largest  and  most  valuable  apartments  in  the  world  are 
among  those  co-operatively  owned  in  the  Park  and  Fifth  Avenue  areas 
of  New  York  City.  A  recent  survey  of  co-operative  apartment  build- 
ings in  the  Borough  of  Manhattan  showed  that  there  were  more  than 
one  hundred  such  buildings  in  the  area  east  of  Fifth  Avenue,  which 
represented  an  investment  of  approximately  $132,000,000.  New  build- 
ings planned  since  the  making  of  this  survey  bring  the  total  amount  of 
co-operative  apartment  capital  invested  or  presently  to  be  invested  in 
this  area  up  to  approximately  $160,000,000.    There  are  also  very  sub- 


stantial  co-operative  apartment  investments  in  other  areas,  such  as 
Washington  Square,  the  Upper  West  Side,  Hudson  View  Gardens, 
Brooklyn  Heights  and  Jackson  Heights.  A  tremendous  amount  of 
capital  has  been  invested  in  co-operative  apartments  everywhere  and  it 
is  believed  that  the  amount  so  invested  in  Greater  New  York  to-day  is 
substantially  in  excess  of  $200,000,000.  The  extent  of  this  investment  is 
one  evidence  of  the  favor  with  which  modern  co-operative  apartments 
have  been  received  by  investors  and  home  owners. 

While  most  co-operative  apartment  ownership  groups  hold  their 
properties  in  fee  ownership,  a  few  such  groups  hold  only  leasehold  es- 
tates in  the  apartment  buildings  which  they  operate.  There  is  no  reason 
why  a  leasehold  apartment  property  cannot  be  as  successfully  or- 
ganized and  operated,  on  a  co-operative  ownership  basis,  as  a  fee  prop- 
erty. Owners  who  have  been  unable  or  unwilling  to  convey  full  per- 
manent ownership  of  real  property  have  long  been  accustomed  to  trans- 
fer lesser  estates  by  granting  long  term  leaseholds.  The  grantee  of  a 
long  term  leasehold  acquires  what  amounts  to  complete  dominion  over 
the  leased  property  for  the  term  specified  in  his  lease.  Many  valuable 
apartment  and  business  buildings  in  New  York  City,  notably  those  now 
standing  on  railroad  property  in  the  Grand  Central  area,  have  been 
built  upon  leasehold  land.  Several  leasehold  apartment  properties  on 
Park  and  Fifth  Avenues  are  now  being  successfully  operated  by  co- 
operative apartment  corporations. 

The  co-operative  apartment  corporation  which  acquires  a  leasehold 
property  must  have  a  financial  structure  materially  different  from  that 
of  the  corporation  which  owns  a  fee  property.  A  modern  leasehold 
estate  is  usually  granted  for  a  term  of  twenty-one  years  with  the  right 
to  three  renewals  of  twenty-one  years  each,  making  the  total  possible 
period  of  possession  eighty-four  years.  The  co-operative  apartment 
corporation  to  which  such  a  leasehold  is  granted  must  assume  the  pay- 
ment of  a  rental  equivalent  to  five  or  six  per  cent,  of  the  appraised  value 
of  the  leased  land  and  this  value  must  in  most  cases  be  reappraised  at 
the  beginning  of  each  renewal  term  of  the  leasehold.  At  the  expira- 
tion of  the  last  renewal  term  the  land,  with  all  buildings  and  improve- 
ments then  standing  thereon,  reverts  to  the  owner  of  the  fee.  Although 
leasehold  estates  are  often  mortgaged,  the  co-operative  apartment  cor- 
poration which  owns  a  leasehold  usually  has  no  mortgage  indebted- 
ness and  no  mortgage  refinancing  problems.  To  offset  the  loss  of  the 
property  upon  the  expiration  of  trie  lease,  the  operating  and  mainte- 
nance charges  of  a  co-operative  apartment  corporation  of  this  type  are 
usually  made  large  enough  to  provide  a  sinking  fund  which  will  be 
sufficient  at  the  expiration  of  the  lease  to  reimburse  the  stockholders 
of  the  co-operative  apartment  corporation  for  the  entire  amounts  of 
their  original  investments.  Because  of  the  length  of  the  term  of  a 
lease  of  this  kind  and  its  renewals  a  very  small  sum  set  aside  annually 
will  be  sufficient  to  establish  such  a  sinking  fund. 

Whether  or  not  they  are  built  on  land  owned  in  fee  or  on  land  held 
under  leasehold,  most  of  the  apartment  buildings  which  are  success- 


fully  owned  and  operated  on  a  co-operative  ownership  basis  are  build- 
ings to  which  the  modern  co-operative  apartment  ownership  plan  has 
been  fully  applied.  When  the  plan  is  fully  applied,  substantially  all 
of  the  space  in  the  building  is  owned  and  occupied  by  members  of  the 
co-operative  ownership  group  and  there  can  be  no  vacancies.  Build- 
ings fully  occupied  by  their  owners  are  usually  known  as  "100%  Co- 
operatives" to  distinguish  them  from  buildings  to  which  the  co-opera- 
tive ownership  plan  has  been  only  partially  applied. 

There  are  also  many  buildings  to  the  ownership  of  which  the  mod- 
ern co-operative  apartment  ownership  plan  has  been  successfully  ap- 
plied in  a  limited  manner.  When  the  plan  is  partially  applied,  somewhat 
less  than  all  of  the  space  in  the  building  is  owned  and  occupied  by 
members  of  the  co-operative  ownership  group  and  the  remainder  of 
such  space  is  offered  for  rent  to  the  public.  This  form  of  ownership  is 
often  known  as  "partially  co-operative"  or  "group"  ownership  to  distin- 
guish it  from  fully  co-operative  ownership. 

When  an  apartment  building  is  held  under  partially  co-operative 
or  group  ownership,  the  entire  building  is  operated  for  the  benefit  of 
only  a  few  of  its  occupants.  These  own  the  equity  in  the  building 
through  the  instrumentality  of  a  holding  corporation.  Each  member 
of  the  group  holds  stock  in  this  corporation  which  has  a  value  equiva- 
lent to  the  amount  of  capital  he  has  contributed.  Each  such  member 
also  has  a  right  to  the  exclusive  occupancy  of  one  or  more  apartments 
by  virtue  of  an  agreement  with  his  associates  or  of  a  proprietary  lease 
from  the  holding  corporation.  Group  members  usually  occupy  between 
twenty  and  fifty  per  cent,  of  the  space  in  the  apartment  building  and 
offer  the  remainder  for  rent.  The  revenues  received  from  rentals  of 
the  apartments  which  group  members  do  not  occupy  are  applied  to  the 
payment  of  operating  and  maintenance  charges  and  to  the  amortization 
of  the  mortgage  indebtedness  of  the  holding  corporation.  To  the 
extent  that  such  revenues  suffice  for  the  payment  of  these  expenses  the 
group  members  are  relieved  of  responsibility  therefor.  When  all  of  the 
available  apartments  are  rented,  group  owners  are  often  able  to  enjoy 
their  own  apartments  without  paying  maintenance  expenses  of  any 
kind.  In  some  cases  the  holding  corporation  actually  earns  a  consid- 
erable surplus  which  can  be  used  either  for  the  prepayment  of  mort- 
gage indebtedness  or  for  the  payment  of  dividends  to  the  group  members. 

An  apartment  investment  in  a  partially  co-operative  building  has 
greater  possibilities  of  both  profit  and  loss  than  an  investment  in  a 
100%  co-operative  building.  The  success  of  the  partially  co-operative 
investment  depends  upon  the  success  with  which  apartments  can  be 
rented.  When  renting  is  easy,  profits  will  be  large,  and  when  renting 
is  difficult,  there  may  be  no  profits.  Investors  in  partially  co-operative 
enterprises  are  always  exposed  to  the  risk  of  losses  from  vacancies  and 
most  of  the  other  expenses  and  losses  which  an  ordinary  landlord  can- 
not avoid,  such  as  expenses  of  advertising  vacancies,  losses  from  un- 
collectible rents,  renting  brokerage  commissions  and  expenses  of  re- 
pairing and  redecorating  the  rented  apartments.     An  investor  who 


holds  only  a  minority  of  the  stock  of  the  holding  corporation  which 
owns  a  partially  co-operative  apartment  building  is  also  almost  always 
exposed  to  the  risk  of  being  outvoted  by  a  small  group  of  his  associ- 
ates. Many  apartment  investors  consider  these  risks  as  of  slight  im- 
portance when  compared  with  the  possibilities  of  large  profits  and  low 
or  free  maintenance  which  various  plans  of  group  ownership  afford. 
Many  other  investors  prefer  to  avoid  all  such  risks  by  purchasing 
apartments  in  a  100%  co-operative  building. 

Each  co-operative  apartment  enterprise  must  be  judged  on  its  own 
merits  and  by  much  the  same  standards  as  would  be  applicable  to  any 
other  enterprise.  The  success  of  a  particular  apartment  ownership 
project  will  depend  chiefly  upon  the  extent  to  which  five  fundamental 
requirements  have  been  satisfied.    There  must  be: 

-1.  A  Well  Chosen  Location, 

2.  A  Well  Built  Building, 

3.  Intelligent  Organization  and  Finance, 

4.  Competent  Management,  and 

5.  A  Respectable  and  Responsible  Ownership  Group. 

The  probable  life  of  a  modern  high-class  apartment  building  has 
been  estimated  at  fifty  years.  To  demolish  it  or  convert  it  to  any  other 
than  residential  use  would  be  a  very  expensive  work.  It  is  therefore 
essential  at  the  outset  that  a  building  of  this  type  be  erected  upon  a 
well  chosen  site.  The  site  must  be  in  an  area  which  has,  and  is  likely 
to  continue  indefinitely  to  have,  a  high-class  residential  character.  The 
site  should  also  be  in  an  area  in  which  land  values  are  stable  or  in 
which  such  values  show  promise  of  future  increase.  An  apartment 
building  built  upon  a  site  of  this  kind  is  apt  to  have  the  longest  use- 
fulness to  the  co-operative  ownership  group.  Any  increase  in  the  value 
of  an  absolutely  owned  apartment  property  will  be  reflected  by  a 
proportionate  increase  in  value  of  the  investment  of  each  member  of  the 
group. 

An  apartment  building  cannot  have  a  long  life  unless  it  is  well 
built.  Careless  workmanship  or  the  use  of  materials  of  poor  quality 
always  causes  conditions  which  must  eventually  be  corrected  at  the 
expense  of  the  co-operative  apartment  corporation.  Inferior  construc- 
tion increases  maintenance  costs  and  decreases  rental  values.  Any 
apartment  building  which  complies  with  all  the  applicable  laws  and 
ordinances  as  well  as  the  rules  jjnd  orders  of  the  New  York  City 
Building  and  Tenement  House  Departments  must  be  reasonably  well 
built.  If  final  certificates  of  occupancy  are  issued  by  these  departments 
there  is  at  least  a  presumption  that  a  building  is  in  most  respects  well 
built  and  that  it  conforms  to  the  plans  and  specifications  in  respect  of 
which  a  building  permit  was  originally  issued.  When  these  plans  and 
specifications  have  been  prepared  and  the  construction  and  equipment 
of  the  building  have  been  supervised  by  an  experienced  apartment 
house  architect  there  is  a  presumption  that  the  building  has  been  proper- 
ly constructed.  Almost  all  of  the  institutions  which  agree  to  make  mort- 


gage  loans  upon  the  security  of  apartment  buildings  employ  the  ser- 
vices of  a  staff  of  experts  for  the  purpose  of  determining  whether  or 
not  such  buildings  have  been  or  are  being  competently  constructed. 
When  a  co-operative  apartment  building  is  mortgaged  to  an  institu- 
tion which  has  a  staff  of  this  character  it  may  be  assumed  that  the 
lender  has  satisfied  himself  by  independent  investigation  that  the  con- 
struction is  or  will  be  of  the  proper  quality. 

When  a  new  building  is  to  be  constructed  for  sale  to  co-operative 
apartment  purchasers,  it  is  essential  that  the  building  plans  and  speci- 
fications be  adequate  in  the  first  instance  and  that  they  be  conscien- 
tiously carried  out  in  the  construction  which  follows.  The  equipment 
of  the  building  must  be  modern  and  complete.  Prospective  apartment 
purchasers  who  find  it  difficult  or  impossible  to  understand  detailed 
plans  and  specifications  can  always  get  intelligent  advice  from  a  disin- 
terested architect  of  good  standing  at  a  moderate  cost.  The  individual 
who  agrees  to  purchase  an  apartment  from  plans  must  have  confidence 
in  the  honesty  and  ability  of  the  builder  who  is  to  construct  the  new 
apartment  building.  If  the  record  and  character  and  standing  of  the 
builder  are  all  of  the  best,  the  investor  may  ordinarily  assume  that 
the  building  will  be  constructed  in  a  satisfactory  manner. 

A  successful  co-operative  apartment  enterprise  must  also  be  intel- 
ligently organized  and  financed.  The  legal  plan  must  be  sound  and 
framed  in  such  a  way  as  to  fix  the  rights  and  responsibilities  of  the 
members  of  the  co-operative  ownership  group  as  between  themselves 
and  also  as  between  each  member  of  the  group  and  the  co-operative 
apartment  corporation.  The  apartment  corporation  must  be  organized 
in  such  a  way  as  to  enable  the  apartment  owners,  who  are  its  stock- 
holders, to  have  the  benefit  of  every  possible  tax  exemption  and  immu- 
nity from  personal  liability.  The  title  to  the  apartment  property  must 
be  good  and  marketable  and  properly  vested  in  the  apartment  corpora- 
tion. 

The  cost  of  the  land  and  completed  building  to  the  co-operative 
ownership  group  must  be  consistent  with  their  appraised  values.  It  is 
not  difficult  to  obtain  reliable  appraisals  of  the  value  of  land  and  a 
completed  building  as  soon  as  plans  are  drawn,  particularly  in  sec- 
tions where  land  values  are  stable  and  constitute  a  large  part  of  the 
investment.  This  value  must  include  organization  expenses,  a  build- 
ers' profit  and  reasonable  carrying  charges  during  construction.  It  is 
essential  that  the  co-operative  apartment  corporation  should  not  ac- 
quire its  property  at  an  excessive  valuation.  The  price  for  which  the 
entire  property  is  to  be  acquired  must  be  fairly  apportioned  among  the 
various  apartments.  The  financial  set  up  must  be  practicable.  The 
permanent  mortgage  financing  must  be  adequate  but  not  too  costly  or 
too  large  to  be  capable  of  easy  replacement.  The  mortgage  debt  ser- 
vice charges  must  not  be  or  be  likely  to  become  unduly  onerous.  If 
the  mortgage  requires  no  amortization  a  separate  mortgage  sinking 
fund  should  be  provided. 


Estimates  of  annual  operating  expenses  and  maintenance  charges 
myst  be  adequate.  The  most  reliable  estimates  are  those  prepared  by 
competent  real  estate  organizations  which  have  had  considerable  ex- 
perience in  the  operation  of  apartment  properties  of  a  similar  class. 
The  total  of  the  estimated  annual  maintenance  charge  plus  the  annual 
interest  on  the  purchase  price  of  each  apartment  should  be  substan- 
tially less  than  the  annual  rental  value  of  that  apartment.  Most  co- 
operative apartment  buildings  are  built  in  localities  where  apartments 
of  various  sizes  have  well  established  annual  rental  values  and  it  is 
seldom  difficult  to  make  this  comparison. 

The  organizers  of  a  co-operative  apartment  enterprise  must  be 
persons  of  unquestionable  business  and  financial  standing.  They  are 
responsible  for  the  sound  and  economical  planning  of  the  enterprise. 
Many  ultimate  savings  can  result  from  the  foresight  of  the  organizers. 
When  the  enterprise  concerns  a  new  building,  the  organizers  must  be 
financially  able  to  purchase  and  pay  the  maintenance  charges  of  all 
apartments  which  are  not  sold  to  tenant  investors.  They  must  be  able 
ultimately  to  deliver  to  the  co-operative  ownership  group  a  completed 
building  in  respect  of  which  there  is  no  indebtedness  except  that  occa- 
sioned by  the  permanent  mortgage  financing.  Individuals  who  pur- 
chase apartments  are  often  obliged  to  depend  to  some  extent  upon  rep- 
resentations and  promises  made  by  organizers  of  co-operative  enter- 
prises. Investors  should  have  no  business  dealings  of  any  kind  with 
unreliable  or  untrustworthy  promoters. 

It  is  essential  that  a  co-operative  apartment  property  be  com- 
petently managed.  The  efficiency  with  which  the  building  is  operated 
will  have  an  important  effect  upon  the  savings  which  will  result  to  co- 
operative apartment  owners.  The  directors  of  co-operative  apart- 
ment corporations  always  reserve  the  right  to  control  the  management 
of  their  properties,  but  usually  entrust  the  details  of  such  management 
to  experienced  real  estate  organizations  which  are  properly  equipped 
to  handle  them. 

Co-operative  apartment  owners  must  be  persons  of  respectability 
and  responsibility.  The  comfort  of  every  such  owner  will  depend  to  a 
large  extent  upon  his  being  assured  of  having  neighbors  of  good  char- 
acter. The  value  of  an  apartment  property  cannot  long  be  maintained 
without  a  high  quality  of  occupancy.  A  co-operative  enterprise  cannot 
function  smoothly  unless  all  of  the ^o-operative  owners  are  persons  of 
sufficient  financial  responsibility  to  pay  the  maintenance  charges  in  re- 
spect of  the  apartments  which  they  occupy. 

When  the  supervision  of  the  sales  of  co-operative  apartments  in, 
and  the  management  of,  a  particular  building  are  entrusted  to  a  com- 
petent real  estate  organization,  the  investor  is  assured  that  his  asso- 
ciate investors  will  be  persons  of  character  and  standing  who  will  be 
neither  objectionable  as  tenants  nor  irresponsible  as  lessees.  He  is  also 
assured  that  his  associates  will  be  persons  who  will  be  likely  to  co- 
operate with  each  other  and  take  a  constructive  interest  in  the  common 


enterprise.  He  can  assume  that  the  business  administration  of  the 
affairs  of  the  co-operative  apartment  corporation  will  be  efficient  and 
along  sound  and  well-established  lines.  He  can  also  assume  that  oper- 
ating matters  will  require  very  little  of  his  attention. 

The  success  of  a  co-operative  apartment  enterprise  which  is  or- 
ganized to  operate  a  leasehold  property  will  always  also  depend  to  a 
large  extent  upon  the  nature  of  the  terms  upon  which  the  leasehold  is 
granted.  These  terms  must  be  fair  to  the  co-operative  apartment  cor- 
poration as  the  holder  of  the  leasehold  and  such  as  will  not  permit 
the  lease  to  be  terminated  for  any  trivial  cause.  The  original  valua- 
tion of  the  land  upon  which  ground  rentals  are  to  be  based  must  not 
be  excessive. 

The  success  of  a  partially  co-operative  apartment  enterprise  will 
always  also  depend  to  a  large  extent  upon  the  allowances  made  for 
contingencies  which  may  arise  in  connection  with  the  renting  of  apart- 
ments which  are  not  occupied  by  members  of  the  co-operative  ownership 
group.  Ample  allowance  must  be  made  for  vacancies,  decorating,  ad- 
vertising expenses,  renting  commissions,  repairs  and  replacements  in  the 
rented  apartments.  Adequate  provision  must  also  be  made  for  the 
gradual  reduction  of  the  mortgage  indebtedness  of  the  partially  co- 
operative apartment  corporation  to  an  amount  which  can  readily  be 
refinanced.  The  rental  values  of  all  apartments  which  are  to  be  rented 
must  be  conservatively  estimated  and  an  allowance  must  be  made  for 
the  possibility  that  such  apartments  cannot  be  rented  for  their  full 
market  value. 

It  would  seem  that  the  investment  problem  of  the  purchaser  of  a 
high-class  modern  co-operative  apartment  is  no  more  difficult  than 
that  of  the  purchaser  of  any  other  kind  of  high-class  residential  prop- 
erty, while  his  operating  problems  are  both  fewer  and  easier.  An  in- 
vestor who  contemplates  the  purchase  of  a  co-operative  apartment 
usually  needs  the  same  quality  of  honest  and  disinterested  advice  that 
he  would  need  if  he  were  contemplating  the  purchase  of  any  other 
kind  of  residential  property.  Unless  he  is  experienced  in  real  estate 
operations,  he  usually  needs  the  advice  of  a  reliable  real  estate 
organization  and  a  reputable  lawyer.  For  obvious  reasons  such 
an  investor  cannot  reasonably  expect  to  get  the  best  advice  unless 
he  consults  a  real  estate  organization  and  a  lawyer  who  are  ex- 
perienced in  the  organization  and  conduct  of  co-operative  apartment 
enterprises. 

When  the  fundamental  requirements  are  satisfied,  an  investment  in 
a  co-operative  apartment  is  a  sound  investment.  It  is  also  a  very 
profitable  investment. 


